• The ISM non-manufacturing index increased from the incredibly low reading of 44.6 in January to 49.3 in February, a little better than the markets had expected
• With February payrolls coming up on Friday, it’s important to note that the employment sub-index is still well below 50 at 46.9, adding further support to our forecast for negative payrolls

The ISM non-manufacturing index improved in February to 49.3 from 44.6 in January. And the pick-up was fairly widespread, as we saw every major category move higher, although most are still below the all-important 50 threshold. The business activity index, which is the former headline number, was the biggest gainer as it increased from its atrocious January reading of 41.9 to 50.8 in February. New orders also improved, from 43.5 to 49.6, as did employment, from 43.9 to 46.9. However, the important thing to note about the employment sub-index is that it’s still well below the zero-growth mark of 50, and is at its second-lowest level since November 2002, when the U.S. economy was in the midst of a major job loss cycle. Combined with this morning’s negative read on the ADP employment report, this supports the case for a negative nonfarm payrolls print on Friday.

Overall, today’s ISM non-manufacturing report indicates that the non-manufacturing side of the U.S. economy is still in contraction territory, along with its manufacturing counterpart, which posted a reading of 48.3 for February. And, the weakness is relatively widespread with 8 non-manufacturing industries reporting growth in February, and 9 industries reporting contraction. With the U.S. economy teetering on the brink of recession, today’s report increases the odds that U.S. GDP will fall into contraction territory in Q1.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

The ECB will remain roughly neutral with a "wait and see" approach on Thursday. The ECB remains caught in a balancing act between dwindling growth prospects with downside risks and high inflation with upside risks, and fears of second-round effects.

Overview

More of the same has been the theme in the last month. On the one hand, inflation remains well above target and commodity prices are surging even though the euro is a mitigating factor. Risks to inflation will remain to the upside and there is little to alleviate the ECB’s fears of second-round effects. On the other hand, the growth prospects continue to deteriorate even though forward-looking economic indicators have been mixed. For example, Ifo continues to defy logic and rose again, while the trend in the PMIs is clearly downward.

The international outlook continues to worsen not least due to a continued deterioration of the outlook for the US economy. The Q4 national accounts for Euroland showed a modest growth of 0.4%, generated almost entirely by investments and exports even though the growth rates are less stellar than previously. Private consumption was very weak and actually fell in Q4. The growth composition should make Euroland quite sensitive to global growth and the financial crisis, further underscoring the risks surrounding the economic outlook for Euroland.

Specifically, the ECB will keep the following statements, which also underline its current dilemma: "risks to price stability over the medium term are on the upside" and "risks surrounding the outlook for economic activity lie on the downside". We also expect the ECB to again stress the unusually high uncertainty from the reappraisal of risks on the financial markets. Overall, the statement will be close to the one from February.

Market interpretation

The interpretation of the statement and the press conference by the financial markets is a tricky matter at the moment. The markets are well ahead of the ECB, but the markets do not expect miracles from the ECB in the short term. A slightly more concerned view on growth balanced by even-higher inflation worry is the general expectation. We expect the tone to be close to market sentiment and we do not think the markets are expecting that much from the ECB following last month’s softening of tone.

ECB staff projections

The March meeting also brings with it the publication of the quarterly forecasts on growth and inflation, which are also bound to receive some attention. The ECB’s dilemma is going to be clear in the staff projections: The growth forecasts will again be lowered, while the inflation estimates will be lifted once more. We expect the growth forecasts for 2008 to be lowered to 1.6%, while the inflation estimate is expected to be lifted to 2.7%. The 2009 growth forecast is set to be lowered to 1.8% and inflation upped to 2.0%, preaching ECB’s target for inflation.

Note that the ECB projections are 1) Staff projections and not the council’s forecast, and 2) Based on forward interest rates and that the cut-off date is the middle of the previous month. Hence for the coming projections the cut-off date is around 15 January, where market levels for forward rates are very close to the current levels where the market is pricing 75-100bp of cuts by mid-2009.

The inflation projection could be seen as a signal that the ECB does not agree with the current market expectations in the sense that it would overshoot its target in 2009 if it cut rates as priced. It is not clear, though, whether 2009 inflation has to be below 2% in order for the ECB to meet its mandate. It could, in principle, argue that inflation will drop below 2% during 2009 - which is also the medium term - and hence would still be in line with its target. It will be an interesting press conference on Thursday.

Danske Bank
http://www.danskebank.com/danskeresearch

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Federal Reserve Chairman Ben Bernanke warned Americans on Tuesday (March 4th) that the current mortgage crisis would likely continue for…

… a while. This was obviously not welcome news to home owners, businesses, or financial markets. Americans are already overwhelmed with negative financial news given fears of an existing or pending recession and the impact of housing and credit burdens already being felt.

Bernanke believes that while the Fed rate cuts, sub-prime assistance, and foreclosure freeze interventions by the government will have a positive impact down the road, he suggested several ways in which lenders and mortgagees could help speed up the process of improving the mortgage situation. Many Americans are concerned that the government and the Fed have not done enough to improve the economic environment. Some believe, however that the government has intervened too much.

Some of Bernanke’s suggestions today centered on lenders working to help struggling home owners by reducing principle balances or working with them to create more manageable mortgage situations. While he praised efforts of some lenders, he wants them to play a bigger role. Many lenders have pondered ways to help borrowers, but some do not want to take the business hit that would result from forgiving some of the principle balance on their mortgages.

All Americans are either directly or indirectly affected by the ongoing mortgage crisis. The record number of foreclosures and delinquent payments during 2007, and expectations for new records in 2008, are directly impacting millions of mortgagees. Over half of the 2007 foreclosures were linked to sub-prime loans. These are loans set up for borrowers with a poor credit history or low income.

Home owners that are managing their payments and who have been responsible with their loans are upset that irresponsible borrowers are being bailed out for making bad choices. The challenge is that even responsible borrowers have been penalized in the housing and mortgage slump. Last year was the first time in forty years that median home values dropped in the US.

With so many foreclosed homes and other properties available in the real estate market, excess supply and low demand has pushed home values down across the country. Home sellers and real estate investors are sitting on properties because they either cannot sell them, or do not want to take the current price the market has to offer. Prospective buyers are also reluctant to take on a new home purchase or mortgage, or are concerned about the ability to sell their existing home.

Bernanke believes that solutions that have more long-term viability are better than band-aid or short-term fixes. In spite of his encouragement to lenders to help out, he is concerned that many borrowers will only find themselves in trouble again. Part of the reason home owners that are keeping up with their loans are upset is that the people the government is working to bail out are in their predicaments, in many cases, because of a history of patterned bad loan decision making. Bad credit is what caused many mortgagees to take on risky sub-prime or other adjustable rate mortgages.

Ultimately, all Americans want to see the economy grow, the housing and mortgage markets rebound, and consumer confidence readings return to healthy levels. The fine line for the government, lenders, and consumers is set between balancing these long-term goals with maintaining fairness and fiscal responsibility in the short-term. Investors seem to be on a roller coaster of emotions. Hope continues to stabilize equities, but every sign of a market surge is met with a negative financial report or comments about continued economic or market weakness.

Market Recap

US stocks were flat on Monday. The Dow dropped 7 points to 12,258. The NASDAQ was off 12, while the S&P gained less than a point. Record high commodity prices and data suggesting more bad news for the economy stifled buyers’ attempts to take hold of the market. Oil again reached a new high. The Dow closed down 45 points Tuesday, but after falling over 200 points earlier in the day, the index made a strong late day recovery. Fed Chief Bernanke suggested the mortgage crisis would continue for a while longer and asked lenders to help. Oil continued higher. The NASDAQ and S&P were both flat.

Neil Kokemuller
Tuesday, March 4, 2008
9:44 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University with a specialization in marketing.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

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With the US stock market falling 450 points since last Thursday and as much as 650 points intraday, carry trades continued to struggle.

CHF/JPY is the only yen cross that closed in positive territory while AUD/JPY is the day’s biggest percentage loser. Finance Minister Nukaga believes that the economy is still on the path to recovery and recent data appears to suggest this possibility.

While short term corrections are certainly a possibility, the Euro crosses exhibit bullish structures on the daily charts. The most bullish of the crosses are the EUR / commodity currencies — EURCAD, EURAUD, and EURNZD.

EURGBP

The EURGBP is nearing the end of a 5 wave rally that began back in January 2007. When wave 3 is extended (as it clearly is here), waves 1 and 5 tend towards equality. In this case, wave 5 (from .7391) would equal wave 1 (.6535-.6867) at .7723. So, while the pair could rally a bit more, the next big move is lower in a large correction that will last many months if not an entire year or more.

EURCHF

The EURCHF drop from 1.6827 is in 5 waves, meaning that at least a countertrend rally is due. The rally probably reaches at least the former 4th wave extreme at 1.6230. It is possible that the 5 wave decline completed an expanded flat from the July 2007 high. We mention this because the rally from 1.6175 to 1.6827 (that ended in October 2007) is best counted as a 3 wave rally; which would make it a B wave.

EURCAD

Given our individual outlooks for the EURUSD and USDCAD, our favored count for the EURCAD calls for a wave 3 of 3 (or C) rally to exceed 1.5200. An intial objective is not until 1.5906 (100% extension of 1.3285-1.5029/1.4162) but bullish potential is even greater. Ideally, price remains above 1.4644.

EURAUD

We wrote last week that “the advance from 1.5491 to 1.7159 is a clear 5 wave advance. A 3 wave (A-B-C) corrective decline will likely resolve itself in the next few weeks…the rally that ensues should exceed 1.7159 and may be the beginning of a much more significant multi-year rally.” We had expected the EURAUD to test the 1.5850 level before the big rally started but it now looks a low is in place at 1.5922. Ideally, price remains above 1.6117.

EURNZD

We wrote last week that “the corrective decline is nearing completion. Wave Y would equal wave W at 1.7907. Another possible terminus for the entire decline is at the 78.6% of 1.7029-2.0170 at 1.7698.” The EURNZD did not reach these levels and instead put in a low at 1.8188. The pair is headed much higher in the coming weeks and months…above 2.0185 at minimum.

TREND ANALYSIS is based on a rolling pivot model. LONG TERM TREND is determined by the last 3 months of price data (high, low, close). SHORT TERM TREND is determined by the last 4 weeks of price data (high, low, close). R3, R2, R1, PL, PH, S1, S2, and S3 are provided to aid in identifying entries and exits. These are objective measures and our subjective analysis (STRATEGY) may differ.

DailyFX

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3/04/2008 - USD/CAD - Taking a good look at longer-term price action on weekly and monthly charts can often illuminate trends and directional biases more readily than on shorter term charts. This can certainly be said about the key USD/CAD pair. As shown on the displayed USD/CAD weekly chart, price has been well-entrenched in a very significant downtrend for many years. The current long-term downtrend has been firmly in place since the beginning of 2002. In addition, the lows reached within the last year have represented some record historical lows for the pair, which culminated in the extreme low approaching 0.9050 on 11/7/2007. Prior to this extreme low being reached, price accelerated its existing downtrend into an even steeper line (represented on the chart by the shorter red line), which is currently still valid. As of this writing, price is very close to the resistance imposed by this line. With the recent bounce down off the line a couple of weeks ago, technical signs are currently pointing towards a continuation of the downtrend. Besides the fact that relatively strong resistance resides closely to the upside, long-term oscillator action on Stochastics is displaying a continuing longer-term down-momentum. If this continuation down indeed occurs, barring any fundamentally-driven breakouts above the current downtrend line, the next major support to the downside resides around the 0.9750 region, and then ultimately at the historical low of around 0.9050.

James Chen
Chief Technical Analyst

FX Solutions

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(Chart courtesy of FX Solutions’ FX AccuCharts. Price on 1st pane, Slow Stochastics on 2nd pane; uptrend lines in green; downtrend lines in red; horizontal support/resistance lines in yellow; 200-period simple moving average in light blue.)